General Banking

Table of Contents

1. Bank and Banking
2. Classification of Banks
3. Types of Banks
4. Commercial Banks
5. Functions of a Bank
6. Bank's Funds (Sources)
7. Bank's Instruments
8. Retail Banking
9. Bank's Credit
10. Trade Finance

Bank and Banking

 The word “Bank” in its literary meaning is difficult to be defined functionally. But its meaning/connotations can be ascertained.  Therefore, as a noun Bank refers to, incline, sideway, edge, ramp, rise, slope or border, etc. As a verb, it refers to a heap, a mass, a mound, a pool, a sideway, etc. Bank as a phrasal verb “Bank on” is used which means “reposing confidence or hope” in someone.

 History conveys that money is not very old but doing business is as primitive as human society itself and so are the languages. If money is not old then Bank is also not old. The business was mainly conducted by the exchange of goods for goods (Barter Trade).

 History also tells that the word “Bank" has been derived and coined from the Italian word “Banco” or Banque” which means “Bench. It is because the Jews used to sit on benches in the Lambard while transacting the money business. It is not appealing because why Bench? Why not “bencherie”?. But the money changers in Italy were never called “bencherie”.  Other historians have opined that it is the German word “Bank” which stands for “joint stock fund”. It sounds good and may be acceptable.  However, another view can also be expressed emphatically that since the term Bank;

 1.     As a noun it refers to a “Pool”.

2.     As a verb it refers to “reposing confidence or Hope”.

 These meanings and usages of the word “Bank” complement each other and define a bank as the legal place where people repose their confidence and pool their money.

Banking

The term banking can be defined functionally as;

1. Gilbert defines a bank as, "A banker is a dealer in capital or more properly a dealer in money. He is an intermediary party between the borrower and the lender".

2. According to Kinley, "A bank is an institution which receives deposits and advances loans." 

     “Accepting deposit for the purpose of lending”.

“Channelizing savings into investments”.

“Accepting for the purpose of lending or investments, of deposit of money from the public and repayable on demand or otherwise”.

 “Collecting funds from the “Haves” and giving it to the “Have-nots”.

According to J.W Gilbert, "A Banker is a dealer in the capital, more properly, a dealer in money. Banker is an intermediate party between the borrower and the lender. Banker borrows from one party and lends to another".

Dr. Herbert L. Hart defines a banker as " a person or a company carrying on the business of receiving moneys, and collecting drafts, for customer subject to the obligation of honouring cheques drawn upon them from time to time by the customer to the extent of amount available on their current accounts".

Classification of Banks

 Banks are classified on two bases i.e. Unit Banking and Branch Banking. Unit banking refers to a bank where all banking activities are carried out in one office. This practice of unit banking has been carried out in the United States. It is a single-unit bank having no branches or other offices. Business all over the country and even internationally is carried out through agency agreements and correspondent banking.

 Branch Banking is altogether different and banks under this classification carry their business through the establishment of branches under the same name and logo within the country and internationally. This class of banking has been practiced in UK and Europe. The head office is situated in the country of incorporation and branches throughout the state and counties and countries carrying out business under the umbrella of the same Head Office. The administrative system may be vertical or horizontal depending upon the organizational policy of the Bank.

 Types of Banks

 The generic function of a bank is that of collecting saving for the purpose of lending and investment. But the variety of sources of funds and the variety and diversity of lending and investment of funds place the banks in different categories. On the basis of functions and mandate of the license, these banks are divided into Central Bank, Commercial Bank, Savings bank, Development Bank, Investment Bank, Credit Bank, Agriculture Bank, Industrial Bank, EXIM Bank, Mortgage or Housing Finance Bank, etc.

Commercial Banks

 Commercial banks were established for the purpose of collecting the thrifts and advancing the same to the traders for the short term thereby developing economic activities in the society. Inculcating the habit of savings and supporting small businesses for meeting their short-term working capital requirements. With the passage of time, commercial bank opened their doors to the corporate sector by accepting their surplus funds and advancing long-term loans for the establishment of new projects and expansion of the existing units. Commercial banks also embark upon entertaining domestic and international trade. As evident from the function mentioned above commercial banks expanded the sphere of their activities and enfolded the activities of specialized banks like agriculture banks, industrial development banks, Merchant Banks, etc. 

Commercial Banks maintain chequing accounts and provide remittance, safe deposit, and safe custody services to their clients. Contemporary Commercial Bank goes the extra mile in services and provides its clients the Standing Instruction services, advisory services, cash management services, collection services, and corporate banking services. Commercial Banks also maintain foreign currency accounts and provide retail FC services to the citizen subject to authorization from the monetary authorities.

Functions of a Bank

 Acceptance of Deposits: Deposits are the backbone of any banking business. Bank raises deposits by offering various liability products. The bank collects money from the public through these products. The banks open various accounts like current, saving, fixed deposit, profit, and loss sharing saving accounts, profit and loss sharing term deposit, short term, and call deposit.  These liability products from sources of funds that provide lending power to a bank depend.

 Advances/ Credit: The loans are issued out of deposits. Banks provide short-term loans. The rates of interest depend upon time and amount of loan. The people can borrow against securities like goods, shares, gold ornaments, and other assets, banks provide funds in the shape of cash financial loans, running finance over-draft, demand finance loans, term loans, student loans, and discounting and purchase of bills of exchange.

 Remittances/Transfer of money: Banks by virtue of branch networking and agency arrangements can transfer money from one place to another through bank drafts, collection of cheques, telephonic transfer, standing instructions, direct debit, wire transfer, internet, and online IBT. The bank can also purchase bills of exchange to help others for collection' of money from their debtors at different places.

 Issue media of exchange: The banks issue Banker’s cheques and bank drafts which are used to settle the claims. This media of exchange is used like currency notes in business dealing.

Collections:  Banks collect cheques, and bills of exchange on behalf of customers. The cheques may. be local or outstation. The bank as agent collects, pension, dividend, rent and interest for the customers.     

Deal in securities: The banker purchases and sells securities like shares, debentures, and bonds on its own account and according to the customers' needs. 

Acceptance of bills of exchange: As an agent, the banker accepts the bills of exchange on behalf of the customers. 

Foreign exchange and trade services: Commercial Banks deal in foreign currency as authorized by the Central Bank/ Monetary Authority of the State. International money orders mail and cable transfers, letters of credit, traveler's cheques Debit/ Credit Cards. 

Safe custody and safe deposit Lockers Services: The banker provides lockers service' for valuables and securities. The hank charges rent for such services and facilities. 

Agency Services: Banks provide agency services to the Govt. (collections of tax, dues, levies, etc.) and to other banks and customers in carrying out their routine businesses. 

Payment of expenses (Standing instructions): The bank makes payment of insurance premiums, trade subscriptions, and other duties under the instructions of the customers. 

Executor and trustee: The banker acts as executor and trustee of property on behalf of customers.

Bank's Funds (Sources)

Commercial Bank sources of funds include;

1.     Capital; It represents that part of the authorized/ assigned capital that has been fully subscribed and paid.

How much capital is adequate for a bank? Here the interest of Bank Management and that of the regulator collides. Regulators are interested in safe and secure banking, the safety of depositors’ funds, and a stable financial market. On the other hand, Management seeks high leverage and high profit. Low capital makes it possible to use the depositor's and subordinated debt funds and generate high ROE and ROA. However, the thumb rule is that those banks who invest in high-risk assets need a high amount of capital as fall back whereas those banks who invest in secure assets and take low risk may work successfully with less amount of capital.

2.     Subordinated debt; Long-term debt issued by the bank but these debt instruments must be issued with the condition of subordination to the depositor's claims in case of liquidation.

3.     Sale and Leaseback of an asset.

4.     Premium reserves

5.     Profits

6.     Customer deposits

7.     Money Market deposits

8.     Advance payment received

Bank's Instruments

1. Cheque; Cheque is a “Bill of Exchange”
2. Bill of Exchange; Bill of exchange is an “unconditional order in writing signed by the maker directing a certain person to pay on demand or at fixed or determinable future date a sum certain in money only to or to the order of certain person or to the bearer of the instrument”. It contains the following important points; 
• An unconditional order
• Written and signed by the maker (One Party- the Drawer)
• Direction for payment of a certain sum of money (2^nd Party- the Drawee
• Payable on demand/ on fixed date/ determinable future date 
• Money is payable to a certain person or bearer of the instrument. (3^rd Party- the Payee) 
3. Bank Draft; A bank draft is an instrument drawn by one branch on another branch of the same bank on its own behalf or on behalf of a client.
4. Banker's Cheque/ Payment Order.
5. Letter of Credit
6. Certificate of Deposits

Retail Banking

It refers to the relationship between individual consumers and banks. A major portion of the bank business comprises individual consumer deposits and loans to small businessmen. The income of a bank comes from the individual customer whether depositors or borrowers. However, it plays an important role in the savings and development of medium and small-scale businesses.

Bank's Credit

Around 80% of the income of a bank comes from loans/ credit. It shows how important and indispensable loan business is for the success and sustainability of a bank. However, credit is not just advancing money and waiting for repayment. Banks are advancing the money of customers that have been placed with banks for return that a cost for the bank. Therefore it is not free money and it’s not the bank’s own money but rather a liability. Hence credit requires expertise, experience, and customer focus policies. Credit needs administration, monitoring, and supervision to avoid default and losses. Before allowing credit few important analyses have to be made as;

1.      SAFETY/ The borrower's

• Character and reliability
• Capacity and responsibility
• Capital/ Resources

2.    PURPOSE; loan applied for and amount of loan; The purpose of the loan is in consonance with the policy of OBU as well as the business of the borrower. Borrower’s credit needs assessment; Analysis of the borrower's business and future plan and identifying the financial need of the borrower.

4.     LIQUIDITY; Borrower’s repayment capacity and sources; Cash flow analysis of historical business and forecast reports. Analysis of financial performance and health of the borrower. Repayment period/ payback period- Bullet or balloon.

5.     REMUNERATION; Return/ price of the loan; Cost of funds and prevailing market rate must be taken into consideration while pricing the loan.

6.    SECURITY; Fall back available; securities and collaterals; Securities must be evaluated on the grounds that it is;

•   Liquid, realizable and marketable
• Transferable
• Stable prices
• Durable
•  Free of Charge
• Yield

Trade Finance

Trade finance has been an area of innovation and product development. International trade has never been so fast, vast and indispensable as it is today. Financing international trade, bankers can not only play a role in the economic development of a country but can generate a stream of income. The fast communication transportation and clearance have made it more lucrative for banks. Commercial banks provide support to economic activity by financing domestic as well as international trade. Instruments of trade available with banks are;

1.  Letter of credit
2. Documentary collections
3. Financing Exports
4. Financing Imports
5. Banker’s Acceptances 
6. Issuing Guarantees